Taxed Out!

When it comes to attracting wealth to a state, tax policy matters. Are your state’s tax policies crushing employers or inviting them in?

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From Townhall Magazine's August feature, "Taxed Out!" by Helen Whalen-Cohen:

Philosophical conservatives and tax hawks have long argued that lower taxes bring in more revenue. The less that businesses and individuals are asked to pay to a particular government, the more inclined they will be to live and work within that jurisdiction. In that age-old debate, conservatives face off against liberal policymakers who believe that raising taxes raises revenue, regardless of changes in behavior.

If the behavior of businesses is any indication, however, the hawks are winning the battle. With pronounced tax policy differences among states, businesses are relocating from states with high taxes to ones with fewer taxes and more stability. The major taxes levied by states that affect business decisions are the corporate tax, the sales tax, the property tax and the state income tax—and these don’t include federal taxes businesses pay.

The Exodus

While other factors such as climate and local regulatory burdens do contribute to a buisness’ decision about where to set up shop, local taxes are an important factor.

New Jersey, New York and California all experienced massive business migration problems—some of the worst in the nation—that come with raising taxes on the most productive individuals. So perhaps it shouldn’t come as a surprise that these states made up some of the worst tax climates in the United States, according to the Tax Foundation’s 2012 State Business Tax Climate Index. Each year, the Tax Foundation ranks the 50 states based on their tax climate for individuals and businesses. This year, Rhode Island and Vermont came in 46th and 47th place, respectively, followed by California in 48th and New York in 49th place. New Jersey ranked dead last.

Just ask New Jersey’s governor, Chris Christie, who has been working diligently to fix the tax policies implemented by his predecessor. Once a bastion of wealth, the state of New Jersey bled out $70 billion between 2004 and 2008, as wealthy residents moved to states with less punishing taxes. New Jersey’s The Star- Ledger reported that the main cause was taxes:

“The study [by the Center on Wealth and Philanthropy at Boston College]— the first on interstate wealth migration in the country—noted the state actually saw an influx of $98 billion in the five years preceding 2004. The exodus of wealth, then, local experts and economists concluded, was a reaction to a series of changes in the state’s tax structure— including increases in the income, sales, property and ‘millionaire’ taxes.”

According to The Star-Ledger, the average income of a household that left New Jersey was $618,330, 70 percent higher than the residents who moved in replacing them. Those moving out were also more likely to be, among other professions, entrepreneurs. This is consistent with a 2011 Wall Street Journal report, which found that not only has New Jersey become too reliant on revenue generated by income taxes but that close to 40 percent of those taxes come from the wealthiest 1 percent of New Jersey residents. A study by the New Jersey Chamber of Commerce had a similar message:

“The gross income tax currently accounts for about 36 percent of New Jersey’s revenues, and its volatility can be attributed to the increased concentration of earnings among top earners, coupled with tax policies over the past two decades which increased the top income tax rates, according to the report. … The upward rate means the tax burden falls more heavily on a relatively small number of high-income taxpayers whose business and investment incomes have been subject to heavy fluctuations—in some cases due to the cyclical nature of business and in other cases because of challenging economic times.”

As Michael Egenton, senior vice president at the New Jersey Chamber of Commerce explains, business income is taxed as personal income, making the progressive income tax particularly punitive to business owners.

“It’s a tax on employers,” he tells Townhall. “At the end of the day, business people have to meet bottom line, so they end up doing less hiring, cutting hours, et cetera.”

For tax purposes, profits are considered a business owner’s taxable income. The exact dollar amount will change depending on the business cycle, but being taxed at a consistently high level means that business owners must strain to meet their bottom line instead of reinvesting and expanding.

Want more? Order the August issue of Townhall Magazineto read more of Whalen-Cohen's article.